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STRYKER CORPORATION 2017 FORM 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 28 Employee Stock Purchase Plans (ESPP) Full- and part-time employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 95% of the closing stock price on the last trading day of a purchase period. We issued 163,415 and 159,329 shares under the ESPP in 2017 and 2016. NOTE 9 - DEBT AND CREDIT FACILITIES In January 2017 we issued $500 of senior unsecured notes with a fixed interest rate of 1.800% due on January 15, 2019. Our commercial paper program allows us to have a maximum of $1,500 in commercial paper outstanding with maturities up to 397 days from the date of issuance. On December 31, 2017 there were no amounts outstanding under our commercial paper program. We have lines of credit issued by various financial institutions that are available to fund our day-to-day operating needs. Certain of our credit facilities require us to comply with financial and other covenants. We were in compliance with all covenants on December 31, 2017. Summary of Total Debt 2017 2016 Senior unsecured notes: Rate Due 1.300% April 1, 2018 $ 600 $ 598 1.800% January 15, 2019 499 — 2.000% March 8, 2019 748 746 4.375% January 15, 2020 498 497 2.625% March 15, 2021 746 745 3.375% May 15, 2024 598 602 3.375% November 1, 2025 745 744 3.500% March 15, 2026 988 987 4.100% April 1, 2043 391 391 4.375% May 15, 2044 394 395 4.625% March 15, 2046 980 979 Commercial paper — 200 Other 35 30 Total debt $ 7,222 $ 6,914 Less current maturities 632 228 Total long-term debt $ 6,590 $ 6,686 Unamortized debt issuance costs $ 39 $ 45 Borrowing capacity on existing facilities $ 1,547 $ 1,551 Fair value of senior unsecured notes $ 7,521 $ 6,762 The fair value of the senior unsecured notes was estimated using quoted interest rates, maturities and amounts of borrowings based on quoted active market prices and yields that took into account the underlying terms of the debt instruments. Substantially all of our debt is classified within Level 2 of the fair value hierarchy. Interest expense, including required fees incurred on outstanding debt and credit facilities that were included in other expense, totaled $247, $228, and $108 in 2017, 2016 and 2015. NOTE 10 - INCOME TAXES Our effective tax rate was 50.6%, 14.3% and 17.1% for 2017, 2016 and 2015. The effective income tax rate for 2017 reflects the impact of complying with the Tax Cuts and Jobs Act of 2017, signed into law in December 2017, partially offset by the benefits from the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting on January 1, 2017 and continued lower effective income tax rates as a result of the European headquarters. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2016 and 2015. Effective Income Tax Rate Reconciliation 2017 2016 2015 United States federal statutory rate 35.0% 35.0% 35.0% United States state and local income taxes, less federal deduction 1.2 1.7 2.1 Foreign income tax at rates other than 35% (21.0) (22.2) (17.6) Tax Cuts and Jobs Act of 2017 transition tax 38.0 — — Tax Cuts and Jobs Act of 2017 deferred tax changes 2.3 — — Tax related to repatriation of foreign earnings — (0.3) (3.9) Other (4.9) 0.1 1.5 Effective income tax rate 50.6% 14.3% 17.1% In December 2017 the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction, limitations on the deductibility of certain expenses, and the transition of United States international taxation from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the Act requires taxpayers to calculate a one-time transition tax based on undistributed earnings of foreign subsidiaries. We recorded the transition tax in our current year results which significantly impacted our effective tax rate. Additionally, we recorded additional tax expense to adjust certain deferred tax accounts to the new corporate tax rate. These amounts are our best estimate based on the current information and guidance available at this time and represent provisional estimates of the transition tax related charge and change in deferred tax accounts charge associated with the Act and will be finalized in 2018. Earnings Before Income Taxes 2017 2016 2015 United States $ 499 $ 542 $ 475 International 1,564 1,379 1,260 Total $ 2,063 $ 1,921 $ 1,735 Components of Income Tax Expense Current income tax expense: 2017 2016 2015 United States federal $ 836 $ 94 $ 78 United States state and local 38 50 23 International 133 176 108 Total current income tax expense $ 1,007 $ 320 $ 209 Deferred income tax expense (benefit): United States federal $ 84 $ (17) $ 2 United States state and local (9) (12) 8 International (39) (17) 77 Total deferred income tax expense (benefit) $ 36 $ (46) $ 87 Total income tax expense $ 1,043 $ 274 $ 296 Interest and penalties included in other income (expense), net were expense of ($28), ($1) and ($4) in 2017, 2016 and 2015. The United States federal deferred income tax expense (benefit) includes the utilization of net operating loss carryforwards of $32, $28 and $79 in 2017, 2016 and 2015.